Exclusive: Ex-head of clean energy loan program breaks silence
FORTUNE — Jonathan Silver was hired in November 2009 to run the U.S. Department of Energy’s $34 billion loan guarantee program, which was started under President Bush but super-charged under President Obama as part of the economic stimulus.
This was the program whose best-known success story to date is electric automaker Tesla Motors, while solar panel producer Solyndra stands as its most notable failure.
Fortune recently had the opportunity to catch up with Silver, who has not done any formal media interviews since leaving DOE in October 2011 (although he tweets regularly). He currently is a distinguished visiting senior fellow at public policy think tank Third Way.
What follows is a transcript of our interview, which was conducted via email:
FORTUNE: You had been a venture capitalist before joining DOE in November 2009. What did you believe that the clean energy loan program could do for America’s economy that VCs and other private market forces could not?
SILVER: Government guaranteed debt is a tool that has been used to support many federal policy objectives over the years. Similarly, the DOE loan program invested in projects in support of a set of public policy goals that are not typically part of the private sector’s investment decision-making process, which is generally driven by expected returns.
The government, on the other hand, has an interest in objectives like global economic competitiveness, national security, environmental protection and job creation. Those goals can only be achieved in a relevant time-frame through the rapid, widespread and large-scale deployment of both innovative and commercial clean energy technologies. Given the financial crisis at the time, it was unlikely that these projects, which would help meet these policy goals and help invigorate the clean energy sector, could be brought forward.
You came to the job after the loan program already had been established. How would you have changed the structure/parameters, had you been able to?
The effort to encourage the commercial deployment of innovative forms of clean energy is important and Congress recognized that in creating the loan programs. The mechanics, however, are significantly more cumbersome than they should be. For example, it is unnecessarily hard to hire people, particularly those with a specific expertise that is needed only for a short period of time. The legislation does not permit the use of the full range of financial tools readily available in the private sector, particularly in asset management. The underwriting does not, in fact, create a portfolio, since each project must meet essentially the same criteria and stand on its own merits. Winners don’t offset losers. A sunset date makes sense, but this one was set too soon and did not give applicants whose projects would have benefited from more development, an opportunity to do so. Inter-agency reviews of transactions make sense, but only when the reviewers have sufficient experience to add value to the process.
One of the program’s requirements was that applicants secure private equity co-investment. From your perspective, was this mostly to better ensure applicant solvency/success, or was it more about market validation. And on that last point, did the investor “names” matter? In other words, did DoE give more credence to portfolio companies of an established top-tier VC firm like Kleiner Perkins than to a new VC firm without much of a track record?
To be clear, requirements include the need to raise substantial equity in the project but not necessarily “private equity.” There are numerous sources of capital, such as corporate sponsor equity, etc. that meet the requirement. The source of the capital is relevant, but not from a brand-name perspective. Instead, what matters is the estimated capacity of the capital source to continue to support the company financially if it becomes necessary. Most importantly, each applicant had to show a clear path to a fully-funded business plan before a transaction could be approved, and before the government would fund along the way. In most cases, it was necessary for applicants to raise additional outside capital. If institutional equity investors were involved, their original due diligence was included in the government’s review and also provided some insight into the project’s capacity for additional capital should it have been necessary.
Many of the loans were given to company that had existing long-term offsets, thus likely making them better credits. Why, for the companies without offsets, were there no “outs” for DOE besides the issuer not meeting technical milestones. Perhaps something like a MAC tied to severe changes in solar energy prices (if not with a clawback, at least to stop future payments)? Obviously not common in the private loan market, but you were the lender of last resort.
While each of the projects has robust technical milestones, they also have stringent financial and operational performance milestones as well. These loans were tightly negotiated and included numerous provisions, covenants, reserve accounts, gating functions and milestones. Many of the term sheets run to 50 pages or more.
The most powerful “out” is, of course, to stop funding. It is important to remember, however, that these are debt instruments, and often it is in the lender’s own best interest to work with a borrower before foreclosing on a loan. In addition, if a company is not in breach of a covenant, there is little recourse to stop funding.
Finally, the government is not the lender of last resort. The government is a low-cost source of capital intended to encourage private capital into the sector when the private markets were unable to do so. Projects that could not raise sufficient outside capital simply did not get done.
But what about Solyndra’s fundamental business model? Why was DoE convinced that customers would pay large up-front costs for long-term savings, particularly from a new technology?
While I was not in the government when the Solyndra deal was done, the company clearly qualified for the program. The company’s very innovative technology (the Wall Street Journal called it the country’s top cleantech company in 2010) solved numerous problems, including the costs of both the materials used to build solar panels and the cost of installing them. In addition, panel costs drop as more are produced. Finally, it wasn’t a question of what DOE thought customers would do; real customers bought hundreds of millions of dollars of product. As I recall, revenues grew between 50-100% a year, each year.
Would you have okayed the Solyndra loan, had you been in charge when it was granted?
I can’t comment on transactions I did not work on. I can say that the transaction went through numerous reviews by career professionals and independent review teams and was approved by all of them. I will say that it makes sense for the government to encourage domestic manufacturing, but there are financing tools better calibrated to those kinds of loans than project finance, which was all the program had to work with.
There have been allegations that the DOE loan program was, in part, affected by political considerations — either around the loans themselves, or related activities like layoffs. Are you aware of any actions that were motivated by, or significantly informed by, political considerations?
This issue has been thoroughly vetted and it is compellingly clear that political considerations did not, and do not, play a role in the decision-making process.
Why do you believe Tesla has survived and thrived, while other electric car startups like Coda and Fisker have failed?
You can ask that question about any industry – why do some companies succeed and others fail? Electric vehicles are likely to play a critical and, indeed, leading role, in the future of automotive transportation. Some of them will succeed and some fail. There were once over 200 automobile manufacturers in this country. The vast majority failed or were absorbed by bigger, stronger, more successful companies, yet the automotive industry in the United States was, for decades, one of the great economic success stories of the world. Hybrids and EVs will be an important part of that continued success.
How do you currently view the loan program’s performance? Leaving aside the politics and PR, do you believe the performance justifies renewal?
The program has been a significant success. That success has, unfortunately, been obscured a bit by some of the politics around the program. To date, something like 95% or 98% of the funds invested are money good. Less than 10% of the funds Congress appropriated to pay for loan losses has been tapped and several detailed , independent reviews of the program suggested that it would never tap the full amount (even in a worst-case scenario). Much of the technology and construction risk embedded in these transactions is now largely gone and nearly half the projects are already operational. The first few successes, like Tesla (TSLA), are now coming to fruition.
Markets will always have difficulty deploying innovative technologies at scale. Fundamentally, a program like this is necessary to address that market failure. In an ideal world, the federal government would leverage these programs to create a long-term, self-sustaining infrastructure bank, to provide low-cost loans to innovative technologies on a consistent basis and on a schedule which reflects when both the technology and the company are ready. Other countries are already doing this and have provided meaningful funding for institutions with a much longer time horizon. That approach makes more sense than ours and we are at a comparative disadvantage as a result. It should not be easier to build a clean energy project, particularly with US funding, in India than in Indiana.
As you know, the flow of dollars to U.S. green energy companies hasn’t only slowed from the public sector. VCs also have cut way back, particularly in capital-intensive markets like solar generation and vehicle manufacturing. From your perspective, does this matter – particularly as the natural gas boom makes the U.S. more energy independent?
The flow of dollars into the sector does matter, of course, since capital is required to move any business or industry forward. We need to think hard about how to incentivize private capital flows into clean energy. Venture capital is not a perfect fit. Power generation projects are generally capital intensive, illiquid and provide bounded returns, which makes them more appropriate for tax equity and debt. VCs are more likely to continue to focus on more targeted, smaller dollar opportunities with potentially higher returns.
Unfortunately, available tax equity is insufficient to support the market, and debt capital is only available to a certain number of large-scale, conventional projects. Right now these projects don’t really have access to the equity or debt capital markets. We should encourage that, either through REITs or Master Limited Partnerships. Both have a potentially hugely import role to play in bringing private capital into the industry.